Is Now The Time To Buy Walter Energy?

| About: Walter Energy, (WLT)
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Walter Energy, Inc. (WLT) is quickly rising today -- nearly 14% intraday. As a large producer and exporter of metallurgical coal, the industry-leading company maintains access to strategic high-growth steel markets found in Asia, South America and Europe. Yet the metallurgical coal industry has taken a steep decline in recent years as the prospects of industrial output has remained weak. With a decline in correlated steel prices, metallurgical coal companies have crumbled.

Steep declines in metallurgical coal prices swung Walter Energy to a loss in Q4 2012. Additional industry pressure found in domestic thermal coal markets derived from an ongoing switch to natural gas has also hurt Walter Energy through negative associations. As a result of deteriorating conditions, players in the coal industry have collectively turned sour over the last few years as illustrated in the chart below.

WLT Chart
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WLT data by YCharts

Walter Energy recently reported its Q1 2013 results in early May as seen in the transcript found here. The following points are a few key highlights to consider in light of its latest performance:

  • The company reported an adjusted net loss of $40.1 million, or $0.64/share. Consensus analyst estimates had predicted a $0.90/share loss thereby indicating a 29% earnings beat.
  • Q1 2013 revenues rose to $491 million from $479 million in Q4 2013. This was largely due to a 9% increase in metallurgical coal sales volume and an increase of $3/ton in metallurgical coal average selling prices.
  • Year-over-year, cost performance has improved as the company reduced the cost of sales 3% from that of Q1 2012. This was accomplished despite a 410,000-ton increase in met coal sales volumes.
  • For 2013, capital spending expectations have been reduced $220 million to $170 million. Liquidity has been fortified to $560 million now represented through $236 million in cash and $324 million available through a revolving credit facility.

Thus far, one of the most uncertain factors tied to Walter Energy has been the outlook of the metallurgical coal market in regards to the balance between supply and demand. Production in the United States has increased 13% from Q4 2012 and has largely been seen as a positive indicator. However, the company also noted that Australian coal production was beginning to ramp up and Mongolian production also resumed in April. The increase of supply by both of these countries to China, who stands as the leading driver of demand, has once again allowed supply to overtake demand in the near term.

Nevertheless, Walter Energy continues to have several other positive indicators supporting its current value. Here are a few additional thoughts for investors to consider:

  • The company expects to reduce costs by 15% on a per ton basis for the full year 2013. This stands as a large improvement to the margins considering that the production capacity is expected to remain unchanged as well.
  • With curtailed and even idled operations at several mines, the company maintains the ability to quickly ramp up its operations should the shift in demand begin to look more positive. With steel prices expected to improve around the world, such demand in metallurgical coal is also anticipated.
  • Multiple company insiders recently purchased shares on the open market, representing a cluster-buy scenario. Such confidence is largely seen as a positive indicator and may have been orchestrated to illustrate management's sentiment. The last significant insider purchases on the open market were conducted by several directors in August 2012. The most recent are seen in the chart below.

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With a 73% drop in the stock price over the last year, it remains a tempting inclination to buy Walter Energy in light of a stock that is quickly rebounding. The company is now priced at a market capitalization of $1.2 billion and carries a 1.11 price-to-book ratio. Operationally, Walter's expected improvement in regards to its own cost of production stands as an encouraging ongoing development in light of an uncertain market.

However, the industry continues to fluctuate. The current lack of favorable demand and the competition's growing supply remains far from ideal. It's clear that investors should continue to remain overall cautious in this industry. Yet with such a strong discount to the share price and in light of ongoing insider purchases, it might stand as an ideal time to dip one's toes into a position in Walter Energy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.